SunTrust Banks' shares, like other bank stocks, have been hammered recently amid Wall Street's near-panic over the health of the U.S. financial system.

The odd thing is, despite all the dismal news, SunTrust still appears to be in relatively good shape compared to other hard-hit businesses also making headlines, such as the airline and auto industries.

Unlike Atlanta-based Delta Air Lines, which last week reported a $1 billion loss for the second quarter, SunTrust this Tuesday is expected to report net income of roughly $320 million for the same quarter, according to analyst estimates compiled by financial information service Bloomberg. Last year, SunTrust had a second-quarter profit of $674 million.

So why is it that SunTrust seemingly faces its murkiest outlook in years? Its shares have lost roughly 60 percent of their value in a little over a year, dropping from $90 in mid-2007 to $34.70 Friday, close to their lowest level since 1995.

Part of the problem is that all bank stocks have been caught in the downdraft coming from Wall Street, said Christopher Marinac, with FIG Partners in Atlanta. Short sellers —- investors who profit when a stock price falls —- "are having a field day with these stocks," Marinac said.

Like most other analysts, he doesn't expect SunTrust to report a second-quarter loss. He doesn't really even expect losses in coming quarters.

"I certainly think they're going to survive the storm," he said.

Still, SunTrust's stock price is being pulled lower by investors' fears that a worsening economy will lead to a growing pile of bad debt later, forcing the company to set aside big reserves for expected losses on loans and to raise more capital, said Marinac. That doubt, he said, is trumping SunTrust's diminished but likely positive financial results.

SunTrust has tried to reassure investors as several analysts have speculated that the bank will have to cut its dividend and issue more stock to boost its capital.

After analysts issued a string of negative reports, SunTrust, which typically doesn't comment on such reports or movements in its stock price, issued an unusual statement last month saying it didn't expect to cut its dividend, issue more stock or take a bigger hit than previous estimates from bad loans.

"The problem is, are these companies prepared for the problems that crop up next quarter and next year if the economy gets worse?" said Marinac, who thinks SunTrust should suspend its dividend now. That would allow it to stash about $250 million every three months in a rainy-day fund. "Better safe than sorry," he said.

SunTrust, which declined to comment for this article, is expected, in conjunction with earnings, to explain how it will convert nearly $2 billion of Coca-Cola stock into capital that will meet bank regulators' benchmarks for core reserves.

Investors fear that the continuing problems in the housing and credit markets are generating problems with SunTrust's and other regional banks' portfolio of construction loans; mid-range mortgages, called "Alt-A" mortgages; and home equity loans.

At the end of the first quarter, SunTrust had $1.5 billion in reserves for loan losses on a total portfolio of $123.7 billion.

In a report last week, CreditSights analyst David Hendler said SunTrust may eventually need to set aside an additional $5 billion to cover future loan losses if the economy worsens.

Hendler estimates that would include $2.5 billion for home equity loans, almost $1.4 billion for construction loans and almost $500 million for residential mortgages, including Alt-A and prime mortgages.

The collapse of California-based mortgage lender IndyMac Bancorp, which specialized in Alt-A loans, has renewed concerns about rising defaults of that type of mortgage. They lie between prime and subprime loans in terms of credit quality, but have come to be called "liars' loans" because they often don't require customers to document their incomes.

Possible losses on home equity loans is one worry for SunTrust, which is among the regional banks with heavy exposure to such loans, Hendler said.

Essentially, slumping home values may be turning many of those loans into unsecured debt, Hendler said. Since home equity loans stand in line behind first mortgages in the event of a foreclosure, there may be no collateral left to cover the second loan if the value of a home falls too far.

"Loss rates on home equity lending are rising to levels more like an unsecured loan, such as was normally seen on credit cards," he said. SunTrust also has significant exposure to construction and development loans, according to Hendler's analysis.

Georgia's banks have the highest concentration of such loans in the nation, according to the Federal Deposit Insurance Corp.

The troubles of Fannie Mae and Freddie Mac, the quasi-governmental mortgage purchasing companies, also may have spilled over on big regional banks like SunTrust that do a large business in mortgages.

The two companies buy mortgages from lenders and bundle them for resale to investors, handling about half of the nation's mortgages. Their share prices have plunged in recent weeks, prompting the federal government to step in to prop them up.

A disruption in Freddie Mac's and Frannie Mae's operations could force SunTrust to cut back on its mortgage business, which usually provides up to 20 percent of the bank's revenues, Richard Bove, a banking analyst with New York firm Ladenburg Thalmann, wrote in a recent report.

But Bove, too, said Wall Street's concerns may be overblown in SunTrust's case.

Noting the bank's recent commitment to maintain its current dividend, he speculated that SunTrust could beat analysts' second-quarter projections.

"This could be another story of the negatives running wild with no thought of magnitudes," he said.

 CHARLES W. JONES / Staff 
CRISIS OF CONFIDENCE 
Investors have driven SunTrust Banks' shares down roughly 60 percent over the past year as the subprime crisis, housing slump and overall economy worsened. The share-price remains low despite expectations that the Atlanta bank will report a second-quarter profit this week. What worries Wall Street: the threat of bigger loan losses if the economy deteriorates further. Closing prices on key dates adjusted for dividends and stock splits: 

> July 24, 2007 
$77.61 
SunTrust retreats with 226-point drop of Dow Jones index, driven by mortgage concerns 

> Dec. 20, 2007 
$59.45 
SunTrust spends $1.4 billion to rescue two money market funds hobbled by Wall Street turmoil. 

> Feb. 21, 2008 
$59.15 
Standard & Poor's cuts SunTrust's credit outlook from "stable" to "negative," citing the mutual fund rescue and expected loan losses. 

> June 20, 2008 
$37.27 
SunTrust tries to reassure investors after analysts say it may have to raise capital and cut its dividend. 

> July 7, 2008 
$31.74 
SunTrust stock hits its lowest price since 1995 ($30.92) on growing investor fears of home builder loan losses. 

> Last week (Wednesday) 
$31.83 
SunTrust's shares rise almost 18 percent as banking stocks begin a midweek rally. Better-than-expected earnings during the week from Wells Fargo, JPMorgan and Citigroup lift sector. 

Chart tracks SunTrust Banks' shares from July 13, 2007 ($85.46) to July 14, 2008 ($28.28), to Friday's close (July 18; $34.70).

Source: Yahoo Finance